1. Introduction to Course and Economics
Lecture Notes
1. Economics Defined - Economics is the study of the ALLOCATION of SCARCE
resources to meet UNLIMITED human wants.
a. Microeconomics - is concerned with decision-making by individual
economic agents such as firms and consumers. (Subject matter of this
course)
b. Macroeconomics - is concerned with the aggregate performance of the
entire economic system. (Subject matter of the following course)
c. Empirical economics - relies upon facts to present a description of
economic activity.
d. Economic theory - relies upon principles to analyze behavior of economic
agents.
e. Inductive logic - creates principles from observation.
f. Deductive logic - hypothesis is formulated and tested.
2. Usefulness of economics - economics provides an objective mode of analysis,
with rigorous models that are predictive of human behavior.
a. Scientific approach
b. Rational choice
2
, 3. Assumptions in Economics - economic models of human behavior are built upon
assumptions; or simplifications that permit rigorous analysis of real world events,
without irrelevant complications.
a. model building - models are abstractions from reality - the best model is
the one that best describes reality and is the simplest B Occam=s Razor.
b. simplifications:
1. ceteris paribus - means all other things equal.
2. There are problems with abstractions, based on assumptions.
Too often, the models built are inconsistent with observed reality -
therefore they are faulty and require modification. When a model
is so complex that it cannot be easily communicated or its
implications easily understood - it is less useful.
4. Goals and their Relations -
a. POSITIVE economics is concerned with what is;
b. NORMATIVE economics is concerned with what should be.
1. Economic goals are value statements, hence normative.
c. Economics is not value free, there are judgments made concerning what
is important:
1. Individual utility maximization versus social betterment
2. Efficiency versus fairness
3. More is preferred to less
3
Lecture Notes
1. Economics Defined - Economics is the study of the ALLOCATION of SCARCE
resources to meet UNLIMITED human wants.
a. Microeconomics - is concerned with decision-making by individual
economic agents such as firms and consumers. (Subject matter of this
course)
b. Macroeconomics - is concerned with the aggregate performance of the
entire economic system. (Subject matter of the following course)
c. Empirical economics - relies upon facts to present a description of
economic activity.
d. Economic theory - relies upon principles to analyze behavior of economic
agents.
e. Inductive logic - creates principles from observation.
f. Deductive logic - hypothesis is formulated and tested.
2. Usefulness of economics - economics provides an objective mode of analysis,
with rigorous models that are predictive of human behavior.
a. Scientific approach
b. Rational choice
2
, 3. Assumptions in Economics - economic models of human behavior are built upon
assumptions; or simplifications that permit rigorous analysis of real world events,
without irrelevant complications.
a. model building - models are abstractions from reality - the best model is
the one that best describes reality and is the simplest B Occam=s Razor.
b. simplifications:
1. ceteris paribus - means all other things equal.
2. There are problems with abstractions, based on assumptions.
Too often, the models built are inconsistent with observed reality -
therefore they are faulty and require modification. When a model
is so complex that it cannot be easily communicated or its
implications easily understood - it is less useful.
4. Goals and their Relations -
a. POSITIVE economics is concerned with what is;
b. NORMATIVE economics is concerned with what should be.
1. Economic goals are value statements, hence normative.
c. Economics is not value free, there are judgments made concerning what
is important:
1. Individual utility maximization versus social betterment
2. Efficiency versus fairness
3. More is preferred to less
3
